As economy lags, what levers to pull?

Pressure is mounting for the US government to act soon to prevent a recession.

By Mark Trumbull | Staff writer of The Christian Science Monitor

from the January 7, 2008 edition

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Economic troubles are spreading beyond the US housing market, putting pressure on President Bush and other policymakers to try to prevent a recession.

What they do – or don't do – could have far-reaching implications: from the performance of the economy itself to GOP election prospects to Mr. Bush's own economic legacy. But any such efforts face two large hurdles. First, it is hard for policy to exert a rapid influence on the overall economy. Second, the president has less room to maneuver than in 2001, when he faced a similar slowdown. Then, federal budget surpluses allowed him to push through a tax cut with relative ease; now, he would need to convince a Democratic Congress either to expand the deficit or agree on how to offset the costs in the future. Still, the latest evidence suggests that the federal government must consider doing something.

Unemployment jumped to 5 percent of the labor force in a report released Friday. That's up from 4.7 percent the month before. In a disturbing parallel shift, private-sector job creation turned negative for the month. If that weakness persists and worsens, it would echo what happened the last time the US entered a recession, in 2001.

The slack job market creates an atmosphere of urgency for the president.

"The reports put the administration in rather a bad position," says J.D. Foster, a senior fellow at the conservative Heritage Foundation in Washington. "They don't want to fall into the trap" of appearing complacent.

Yet by considering action, the Bush team could raise public hopes for more than Washington may be able to deliver.

One key policy lever today is monetary. For several months, the Federal Reserve has been cutting short-term interest rates, and now more such cuts are expected. But economists say that it often takes six months or more for such moves by the Fed to have an impact.

Another lever – the one controlled by Congress and the president – involves "fiscal stimulus," such as tax cuts or government spending. Here, economists say the effects can sometimes be quick. But the process of legislation and implementation often takes considerable time.

With this being an election year, and with opposing parties dominating the two ends of Pennsylvania Avenue, the hurdles are even higher than is often the case.

Washington also has a third option beyond broad-based monetary or fiscal policy: Focused efforts to ease the real estate downturn that lies at the core of the economy's slide. Here again, however, politicians are divided about what to do.

A risk in rushing to enact policies is that they may come too late to be useful, may be counterproductive, or may not be needed at all.

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